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Peabody H1'16 US coal production lines up with lower projected run rate

Peabody EnergyCorp. has continued to cut volume, bringing its coal productionrate to below what it anticipated selling a few months ago, but closer in lineto levels projected for its bankruptcy financing package.

According to an S&P Global Market Intelligence analysisof U.S. Mine Safety and Health Administration data, Peabody has produced about65.6 million tons of coal in the first half of 2016. At that rate, an annualU.S. production rate of 131.2 million tons per year would be 12.5% lower thanthe bottom end of Peabody's Feb. 11 sales guidance of 150 million to 160million tons of U.S. coal.

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The reduced production rate through the first half isroughly in line with projections Peabody made after it filed for bankruptcyprotection on April 13.

In a presentation that discusses the company'sdebtor-in-possession, or DIP financing, Peabody acknowledged its first-quarterrun-rates had been below committed levels of 150 million tons to 160 milliontons. According to that filing, key assumptions for the DIP budget includetotal U.S. coal tonnage of about 132.6 million tons in 2016, roughly in linewith the company's rate of production across the first half.

The DIP budget assumes production falls again slightly in2017 to 131.6 million tons.

The company acknowledged at the time of its bankruptcy thatit would be lowering its capital expenditures and focusing on safetyinitiatives and sustaining lower production levels. In a bankruptcydeclaration, one company executive said coal shipments were down 7% in 2015,and year-to-date production through March was down another 31% on top of that.With natural gas prices still pushing lower, the filing noted downward coalproduction trends would likely continue.

The February sales guidance provided as part of its 2015earnings release had already lowered anticipated 2016 production 18 million to28 million tons below 2015 coal production levels. When the company filed forbankruptcy, Peabody noted market dynamics and other factors battering thecoal industry were "unprecedented."

Peabody identified "reshaping the portfolio to unlockvalue" as one of its priorities in 2016. One of the factors that led tothe bankruptcy of Peabody — the largest U.S. coal producer by production — wasa failed deal withBowie Resource PartnersLP aiming to trim Peabody's footprint in the U.S. and secureliquidity.

One of the mines Peabody was trying to sell, El Segundo,reduced production 18.8% from the first quarter to the second quarter of 2016.Foidel Creek, also known as the Twentymile mine, was also part of the failedtransaction. It boosted production 22.1% to 945,995 tons in the same period.

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One production rationalization effort identified by Peabodywas "working tooptimize production levels and mix at the NorthAntelope Rochelle Mine tomaximize margins." After cutting production to 28.2 million tons inthe fourth quarter of 2015, production dropped dramatically to 20.0 milliontons in the first quarter. Second-quarter data shows production remainedroughly flat quarter to quarter.

Overall, Peabody cut production by about 6.8% from the firstquarter to the second quarter. Those same mines produced about 22.4% more coalin the second quarter of 2015.

The bulkof Peabody's production cuts came from its Powder River Basin mines, which arealso by far the largest source of the company's coal volumes. Peabody'sIllinois Basin coal mine production figures have remained somewhat flat, buthave declined slightly both in the quarter-to-quarter and year-over-yearperiods.

Accordingto Peabody's presentation, the company earned gross margins of about $483.0million on 138.8 million tons of coal sold from its North Antelope, Rawhide andCaballo mines in the Powder River Basin in 2015. Peabody's Illinois Basin andWestern Region mines earned roughly $269.0 million and $184.5 million each ingross margin in 2015, respectively, with just 21.2 million and 17.9 milliontons sold.

Peabody is expected to report second-quarter earnings inAugust.